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About Guidance Residential | Halal Vs. traditional mortgage | Business model | Profitability model | Products and Pricing | Customer service | Competition

To live life as a Muslim in the United States means to pursue the American Dream of home ownership while adhering to the ancient and comprehensive tenets of Islam.

The two goals are not mutually exclusive, though they are sometimes challenging to balance. Yet meeting such challenges builds personal character while creating a positive lifestyle of home and family.

About Guidance Residential

Licensed in over 30 states and the District of Columbia, Guidance Residential has assisted countless devout borrowers with home financing for over 20 years. Over 30,000 Muslim households have benefited from this lender’s faith-based approach to home ownership and real estate conveyance.

Its business model was conceived in 1999 through the deliberations of attorneys, religious scholars and financial experts. After three years of research and consultation, Guidance Residential began doing business in earnest.

By 2007, the company had generated over one-billion dollars in home financing. Recognition by religious and secular authorities soon followed. After a decade in business, Guidance Residential had closed on 1,683 contracts and led the way in contributions to Islamic community initiatives.

Over the years, Guidance has opened brick and mortar locations in numerous states and expanded its digital operations capacity substantially. As of 2022, Guidance Residential holds 80 percent of the home finance market that operates in accordance with Shariah standards.

How Does Halal Lending Differ from Typical Mortgage Lending?

In the Unites States, the conventional way of mortgage banking is to leave the legal ownership solely to the borrower while retaining the property as collateral, IE. security in the event the borrower stops making payments on the loan.

Under such rules, the deed and title to the house is in the name of the borrower(s) alone. For this reason, mortgage underwriters are careful to screen their applicants’ credit histories, asset holdings, employment income and other sources of revenue and the value and legal integrity of the property.

In other words, they approve borrowers who are low default risks while confirming that properties have enough value to make foreclosure and re-sale work if default occurs nevertheless.

halal mortgage

This process requires the submission of significant documentation at the time of application and the execution of even more documents at the time of settlement. Should the borrower cease sending in monthly remittances, these assorted forms and papers give the lender the authority to begin the foreclosure process, whereby the bank goes to court to seize the property from the owner.

These proceedings can take months to conclude. For the rest who pay their mortgages on a timely and consistent basis, they are remitting principal,  a portion of the original loan amount, and interest, a charge to the borrower for the opportunity to temporarily use the lender’s money.

Though they formally set their own interest rates, banks and finance companies in the U.S. will look to the Federal Reserve System for guidance on rates in order to profit yet also remain competitive.

Guidance Residential diverges from the conventional business model for home finance institutions in order to maintain Halal principles in its conduct and operations.

The staff at Guidance Residential recognizes this necessity so consults a dedicated group of independent Shariah scholars to evaluate business practices and contracts.

With such an experienced board of advisors, clients might think that every company decision or policy is cut and dried, immune to criticism from an Islamic standpoint. Yet matters of Shariah can be subject to debate among scholars and other experts.

In fact, the Assembly of Muslim Jurists of America (AMJA), in a summary review of Muslim-American home finance providers, included some criticism in what was an otherwise favorable review of Guidance Residential.

While approving of the overall business model as Halal, this organization’s Fatwa Committee did take issue with several particulars relative to taxes, insurance and maintenance.

A look at the Halal business model, as executed by Guidance Residential, can help to shed light on such disagreements.

How Does Guidance Residential Do Business?

AMJA refers to the structure of Guidance Residential contracts as diminishing partnerships. Guidance markets this as Declining Balance Co-ownership Program. The name is apt since, over the course of the contract, the company’s ownership share in a property shrinks as clients make their payments.

From the start, then, the lender is a co-owner with the borrower, and as the contract proceeds to the end of its term, the borrower is buying out the lender to arrive at the point of sole ownership.

Unlike a conventional American mortgage, the lender and borrower are purchasing the property together. This conforms to Halal values of treating customers with justice and honesty, more as colleagues and less as adversaries.

This is the core of Shariah-compliant financing – whereby the financial institution has a stake in the success of the project in which its resources are entrusted. This decreases the possibility of confusion or deceit between parties to a financing transaction. It also helps to advance the goals, economic and cultural, of the entire community as opposed to just one household or family.

Rather than a mortgage and other security documents that name the property as collateral, Guidance customers enter into a co-ownership agreement with the company. For a purchase transaction, for example, a buyer will front a certain amount of the purchase price while Guidance, setting up a limited liability company for this purpose, provides the remainder.

Both the buyer and the LLC own shares in the property, according to what each contributed to the sales price. In a traditional mortgage arrangement, the buyer’s shares would be called equity. Halal, however, recognizes the buyer as an owner from the start of the finance transaction and not simply as a debtor with an obligation to pay off.

Similarly, refinance arrangements would have Guidance Residential, or its designee, assume more ownership shares so the applicant can either pay less per month under a new contract or pull out cash from the property for a particular use.

While buying shares per month from Guidance, the co-owner is in effect diminishing the company’s or investor’s ownership interest.

Still, how does Guidance Residential make money if they do business this way, receiving back only what it spends?

As noted above, the typical American lender charges interest to its borrowers in order to profit from its loans. Yet usury, or riba, is forbidden under Shariah law so a halal finance company is forbidden to gain profit from interest.

How then, does a Shariah-compliant finance business stay afloat without interest?

The key lies in the fact that Guidance is an owner along with its client. As an owner, the company would have the legal and moral right to occupy and utilize the house along with its client.

Guidance Residential, however, yields such rights entirely to its ownership partner for a monthly addition to the buy-out payment. Thus the monthly remittance is composed of the acquisition payment, the cost to acquire the company’s shares, and the profit payment, IE. the cost to enjoy sole use and occupancy of the property.

This component is formulated with a recognition of prevailing interest in order to successfully compete with other lenders.

Some seasoned mortgage veterans might look at this business model with cynicism. After all, mortgages have declining balances and equity represents ownership, while interest is a profit payment.

Are these not the same lending practices of traditional banks and finance companies, simply presented with Islamic vocabulary?

Guidance Residential would reply that the distinction lies with intent. The traditional American model involves lending a certain amount of money to obtain a larger amount of money. The halal way is to enter into an ownership partnership while earning rent for the use of its share of the home, a portion that shrinks over time.

Another important difference can be found in the unfortunate event of foreclosure. Typical foreclosure proceedings end with the owner losing the house and, of course, all of the equity invested until bad circumstances intervened.

Whereas the traditional bank sells the property and retains all of the proceeds, a Shariah-abiding co-owner would instead forward to the customer anything left after its shares have been compensated and costs have been paid back.

A central precept of Islam is never to profit from the difficulties of another.

Guidance Residential Products and Pricing

Observant Muslims would logically gravitate to a Shariah-based financing regime that would in no way burden the conscience. At the same time, most of them must also be conscious of household cash flow, budgets and assets.

Like every other consumer, they do not wish to spend more on a house than is absolutely necessary. This reality begs the question: how do Guidance Residential products and services stack up against those of traditional banks and finance companies?

Do customers save money, spend more money or stay about the same when they opt for halal home finance? Important to remember is that the profit payments for full use and occupancy, by the dictates of federal law, must be marketed as interest rates. Although this does not represent reality from a Muslim perspective, it does allow for a little comparison shopping. 

A summary survey of rates advertised online demonstrates that Guidance profit payment rates track closely, though slightly higher, with interest rates offered by Rocket Mortgage, Quicken Loans, bank of America and other nationwide lenders.

Rates advertised by community banks and local credit unions in various states are sometimes more flexible, thus worth investigating to compare and contrast. These side-by-side examinations, it must be stressed, use the conventional mortgage products, IE. not insured by any government agency.

As Shariah demands that customers pay only for costs incurred by the finance company and value gained from the transaction, Guidance Residential is well within its rights to charge fees relating to the application and underwriting processes.

Often, these charges are regulated by the state or jurisdiction in which the subject property sits. In any event, as with traditional mortgage lenders, Guidance customers must pay fees relative to application, processing, underwriting and closing.

Averaging at three to five percent of the financed amount, closing costs not only include monies owed to Guidance Residential, but also funds escrowed for property insurance and taxes.

This is an area where the AMJA takes issue with the company. Guidance takes the position that, since the co-owner possesses 100 percent use and occupancy, that person or family should pay the entirety of the property tax obligation.

Likewise, applicants are told at the beginning of the partnership process that they will bear full financial responsibility for homeowner insurance. AMJA questions the justice of these lopsided responsibilities while nevertheless approving of the declining co-ownership model.

Prospective customers should factor in such costs when deciding on a halal home financier. The bottom line is that in some places customers may pay more money for a halal financing product with Guidance Residential. Still, the cost differences are not overwhelming. 

Another consideration concerns what the customer brings to the table as a co-owner. Traditional mortgage products will charge a premium for private mortgage insurance (PMI) in the event that the borrower brings less than 20 percent as a down payment.

This kind of charge is unacceptable by Shariah guidelines. How, then, does Guidance Residential protect itself against the heightened risk from a lower co-ownership contribution? When such scenarios arise, the company policy is to increase the profit payment by an amount equivalent to a monthly PMI remittance.

The Shariah Supervisory Board has determined that the greater risk borne by the company is a legitimate cost to pass on to the co-owner.

Guidance Residential makes a range of products available to its customers. Programs that correspond to 15-, 20- and 30-year fixed rate mortgages are underwritten for single-family and multi-family houses, condominiums, town homes and planned unit developments.

These are often primary residences but can also be second homes or investment/income properties. Moreover, Guidance Residential invests in properties with amounts that are both conforming (up to 550K, more or less) and non-conforming (higher amounts).

The Federal Home Loan Mortgage Corporation, or Freddie Mac, the government-chartered mortgage investor, often purchases ownership contracts from Guidance Residential after a sale or refinance has closed.

Does Guidance Residential Offer Special Promotions or Help to Low-Income People?

Guidance Residential has and does incentivize prospective co-owners with offers of cash credit (whereby the company credits the co-owner toward shares in the property).

In an effort to serve those of modest means, the company maintains a co-ownership threshold as low as five percent of the home value. This opens up the American Dream to people shut out by traditional banks and financial institutions.

Of course, all customers must meet certain criteria with regard to income and credit-worthiness. Limited financial assets, on the other hand, should not forbid hardworking residents from home ownership.

Is Guidance Residential Technology-Friendly?

As with many business enterprises, real estate finance has expanded to online platforms. Some of these are slow and complicated, while others are simple and user-friendly. As the years pass, most improve considerably.

Guidance Residential is no exception. Its interactive website elements include a pre-qualification program, downloadable applications, a cost calculator for payments and fees, instant messaging with an account representative and up-to-date status tracking for applications in process. These features, in addition, are accessible with most devices, including smartphones.

halal mortgage

The website also houses an array of informational resources, from white papers on Shariah financing to online articles, videos, webinars, e-books and podcasts. Applicants can upload documents that support their representations, while current co-owners can make payments directly through the website’s intuitive portals.

While the published testimonials contain no praise of the technological options, neither do they evidence any complaints. What is clear is that virtually every step in the application/co-ownership sequence can be executed from home.

Customer Service and Engagement

Mortgage lenders and finance agents often have difficulty differentiating themselves from their competitors. As they offer similar rates in accord with Federal Reserve leadership, they must distinguish themselves in other areas.

The same holds true for Shariah-compliant home finance companies. How can one appeal to its market base apart from its business model and products. The answer lies with customer service.

To attract and retain good customers requires service that is competent, responsive and personable. Often, businesses the size of Guidance Residential can lose the personal touch as they expand.

However, a review of customer testimonials speaks well of at least some of the company’s representatives. Satisfied customers cite the following on the GR website:

1. The representatives stay in touch and keep their customers informed.

2. Quick response times and answering questions with completeness.

3. An easy, unintimidating process leading to co-ownership.

4. No hard sell of one product; all options covered.

5. Availability and involvement of company agents.

Looking more broadly at other sites where reviews appear, birdeye.com, zillow.com and nicelocal.com, the above sentiments are echoed and even amplified. It would appear that a major strength of Guidance Residential is taking the fear of the unknown out of one of the most significant investments a family will ever make.

Yet the company does not do business in isolation.

Guidance Residential Competition

UIF Corporation

Operating on a similar Musharakah partnership model as Guidance Residential, UIF has fewer office location. That said, it has for consecutive years been named the number one Islamic Financing institution in the United States by Islamic Finance News magazine.

In addition, it has its own Shariah Supervisory Board of scholars holding credentials comparable to those overseeing Guidance Residential practices.

Per the UIF website, the range of financing is broad and includes construction, business and vehicle financing as well as real estate funding. Online testimonials and reviews are largely favorable for UIF.

Devon Bank

Founded in 1945 as an independent community bank in the Chicago, IL metro area, Devon Bank is a traditional, full-service bank that recognizes the potential and promise of the Muslim real estate market.

Headquartered in an area of tremendous ethnic and religious diversity, Devon makes an effort to offer halal financing to its Muslim neighbors. To that end, the bank retains the services of the Shariah Supervisory Board of America.

Islamic financing at Devon is based on Murabaha. Under this model, the bank will buy the house selected and negotiated by the customer. Subsequently, Devon will sell the house to the customer, with payments made over a fixed period of time according to the terms of the Murabaha contract.

It must be noted that the AMJA report on Islamic finance entities expresses concern over this model as executed by Devon Bank. It could reflect the difficulties of a traditional bank implementing faith-based policies.

Ameen Housing Co-operative

Established in Palo Alto, California in 1996, Ameen Housing Co-operative (AHC) offers a unique business model that is based on a pool of investors putting their resources into real estate which, in turn, pays back in dividends.

Anyone interested in buying a house must deposit the share with AHC. As AHC invests in successive residential properties, each party that has satisfied the investment requirements moves up a rung on the waiting list.

Upon reaching the top of the list, the investor can then select a house which AHC will finance with its own share. Title to the property is held solely by AHC until the investor pays for the co-operative’s shares in full.

Each month, during this time, the occupant pays rent to AHC as well as the principal for the ownership shares.

AMJA took issue with Ameen’s late payment procedures in its 2014 resolution on Islamic home finance, but then commended the organization for revising them.

LARIBA American Finance House

LARIBA was founded in California in 1987. LARIBA’s “Declining Participation in Usufruct” (DPU) model has the homeseeker assuming title to an acquired property while LARIBA maintains its usufruct, IE. the right to use and enjoy the house and land.

This arrangement, according to LARIBA, suggests implied co-ownership whereby the new owner can then purchase the company’s shares. This represents sort of a reversal of roles under declining ownership, when the occupant pays rent to the co-owner while purchasing shares.

AMJA charges that this design builds interest into the payments and should be eschewed by Muslim homebuyers. Nevertheless, LARIBA posts an independent Shariah auditor report certifying that the DPU model is in fact halal.

Should I Work with Guidance Residential?

The question of whether or not to retain Guidance Residential is a question of priorities. If a halal product is the highest, Guidance Residential presents a financing standard that appears to meet the benchmarks as established by Islamic scholars and jurists.

If customer service is of primary importance, it is hard to find a negative word about Guidance Residential’s representatives and operations.

However, if minimizing costs leads the requirements, Guidance Residential does not out-perform traditional lenders and mortgage companies in terms of rates and fees, at least not consistently.

As Muslims and consumers, customers must decide what is most important.

Conclusion and Summary

People of every religious faith must face conflict when navigating a secular society. They can be grateful when businesses recognize their values and make ways to accommodate them.

Though they may take pains to implement those values, e.g. the avoidance of riba, businesses nonetheless exist to make money. Customers who discern these truths transact with like-minded enterprises like Guidance Financial, but do their homework first.